Elevation Gives Palm a Leg Up

Struggling smartphone maker Palm (Nasdaq: PALM) just got a US$100 million shot in the arm from private equity group Elevation Partners.

In an investment agreement announced Monday, Elevation acquired new issues of preferred stock in Palm for $3.25 per share, a 31 percent premium over the closing price of Palm's stock last week.

Elevation also received warrants to acquire 7 million shares of Palm's common stock at the same price. Under the agreement, Menlo Park, Calif.-based Elevation has the option to sell up to $49 million worth of its new investment in Palm to other investors.

Elevation, which was cofounded by Irish rock superstar and humanitarian Bono, invested $325 million in Sunnyvale, Calif.-based Palm in 2007.

The $100 million cash infusion comes at a critical time for Palm, which is set to launch a new mobile operating system at the Consumer Electronics Show in early January.

Palm's stock was up 22.5 percent to close at $3.05 per share on Monday. Shares were trading at $3.40 by mid-day Tuesday.

iPhone, BlackBerry Dominance

Palm was one of the premier handheld device makers in the late 1990s and early 2000s with such products as the Palm Pilot and the Treo smartphone.

However, in recent years, competitors such as Research In Motion's (Nasdaq: RIMM) Blackberry and Apple's (Nasdaq: AAPL) 3G iPhone have steadily eroded Palm's share of the smartphone market.

Palm ran into trouble when it failed to follow up the Treo with a new product for the smartphone market, observed Tavis McCourt, an equity analyst at Morgan Keegan & Co.

"The capabilities of PDAs were subsumed by smartphones," he told the E-Commerce Times. "There was no reason to carry around a separate device to carry around contacts and calendars. They rightfully entered the smartphone market and were reasonably successful with the Treo, but they failed to continue innovating."

In the first half of 2008, Palm launched the Centro, a $99 smartphone meant to appeal to price-conscious consumers, McCourt said.

The Centro was a success with Sprint (NYSE: S) and Verizon Wireless, but less so with AT&T (NYSE: T). T-Mobile USA doesn't carry Palm products and hasn't done so for years, McCourt noted.

However, Palm wasn't able to follow up the Centro with another product, and the company's financial results suffered in the second half of 2008.

"The second half has been pretty awful as the Centro matured," said McCourt.

New versions of the Treo smartphone are ready to go but won't become available until Sprint launches the product line in January, McCourt said. Why Verizon or AT&T haven't launched yet is unclear.

Nova Hopes

"Palm's fate is dependent on the new platform," James Faucette, an equity analyst at Pacific Crest Securities, told the E-Commerce Times. "The capital infusion [from Elevation] is intended to make sure that the new operating system has the best opportunity to really demonstrate itself in the market."

Palm is also working on a slew of new smartphone products that will run the Nova operating system, Faucette said.

However, Palm will only get one swing at making Nova a success, said Morgan Keegan's McCourt. "If the new operating system is a success, then Elevation could end up making a lot of money on their investment. If not, it's not clear what the future of Palm will be."

The Next Motorola?

Palm seems to have run a parallel course to another struggling mobile device maker, Motorola (NYSE: MOT), though its problems don't seem to be as dire, Pacific Crest's Faucette said. "Whereas Motorola has only recently appointed someone to lead them to recovery, Palm has been embarked on their recovery for the last 18 months."

Faucette pointed to the hiring of Palm's executive chairman, Jon Rubinstein, who heads the company's mobile device development efforts. Rubinstein is a 10-year Apple veteran who was instrumental in the development of hit products such as the iMac, the iPod and the iPhone.

"Jon Rubinstein was more than Steve Jobs' right-hand man," Faucette said. "His experience with Jobs extends back to Jobs' original tenure at Apple."

The $100 million investment from Elevation gives Rubinstein and Palm some breathing room to revive the company.

"With this new $100M in capital, even if the new platform weren't to launch this year, Palm could make it into 2010," Morgan Keegan's McCourt said. "Once Palm starts selling [Nova-powered devices], it can start generating cash flow, and there won't be as much concern over cash position."

Recession Woes

Palm isn't struggling alone. The year-long U.S. recession has affected other mobile phone manufacturers such as Nokia (NYSE: NOK) and Research In Motion. The launch of the iPhone has exacerbated the problem, noted Pacific Crest's Faucette.

"The Centro was doing pretty well and was positioned as a $99 retail smartphone," he said, "but then Apple came out with the 3G iPhone for $200, and consumers saw that they could get a much better smartphone for only $100 more. The subsequent indirect impact put a lot of pricing pressure on everyone in the industry, forcing prices down."